It's not a stretch to say that Hyphens Pharma International Limited's (Catalist:1J5) price-to-earnings (or "P/E") ratio of 8.8x right now seems quite "middle-of-the-road" compared to the market in Singapore, where the median P/E ratio is around 10x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.
With earnings growth that's superior to most other companies of late, Hyphens Pharma International has been doing relatively well. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.
View our latest analysis for Hyphens Pharma International
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Does Growth Match The P/E?
Hyphens Pharma International's P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 75% last year. Pleasingly, EPS has also lifted 101% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.
Shifting to the future, estimates from the two analysts covering the company are not good at all, suggesting earnings should decline by 7.2% over the next year. The market is also set to see earnings decline 2.9% but the stock is shaping up to perform materially worse.
In light of this, it's somewhat peculiar that Hyphens Pharma International's P/E sits in line with the majority of other companies. With earnings going quickly in reverse, it's not guaranteed that the P/E has found a floor yet. Maintaining these prices will be difficult to achieve as the weak outlook is likely to weigh down the shares eventually.
The Key Takeaway
While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
We've established that Hyphens Pharma International currently trades on a higher than expected P/E since its earnings forecast is even worse than the struggling market. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. We're also cautious about the company's ability to resist even greater pain to its business from the broader market turmoil. Unless the company's prospects improve, it's challenging to accept these prices as being reasonable.
You should always think about risks. Case in point, we've spotted 2 warning signs for Hyphens Pharma International you should be aware of, and 1 of them doesn't sit too well with us.
If you're unsure about the strength of Hyphens Pharma International's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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